Should you buy a house or stay on rent?

Till about 2012-13, when the rate of interest was high and tax sops were lower - which led to higher mortgage yield of 7-8% compared to 3% rent yield - people still bought real estate because they were enjoying 10-12% annual appreciation in the price of the houseTNN | December 31, 2015, 19:00 IST

The 'rent versus buy' decision depends on the difference between mortgage yield and rent yield. People prefer to rent a house when they pay substantially less as rent than what they would be paying if they were to buy a house on loan.

Till about 2012-13, when the rate of interest was high and tax sops were lower - which led to higher mortgage yield of 7-8% compared to 3% rent yield - people still bought real estate because they were enjoying 10-12% annual appreciation in the price of the house.

At present, the rate of interest is falling with mortgage yield nearing the 5.5% mark while rent yield is about 3%. A further fall in home loan rate would make it affordable for people to buy a house to live in (as against for investment) than stay on rent.

A house in Panvel (a Mumbai suburb) would cost about Rs 50 lakh. One would have to pay 3% of the value of the house as rent annually. But the same person may prefer to pay, say, 4-4.5% of the house's cost as home loan repayment, after adjusting for tax sops, to move from a rented to an owned house.

"While a 4-4.5% mortgage might appear Utopian, this is the mortgage yield if the borrower factors in the tax breaks that he gets for up to Rs 3 lakh (Rs 2 lakh as interest, and Rs 1 lakh as principal repayment)," Gagan Banga said. "So by effectively paying Rs 3,000 to Rs 4,000 more every month, you are upgrading from a rented to your own home."